National Insurance Contributions - a quick guide

Employees

Class 1 national insurance contributions (NICs) are paid on employees’ earnings, usually by both the employee and employer. NICs are payable on all gross earnings, including salary, overtime, commissions and bonuses, on readily convertible assets given to employees and on contributions to funded unapproved retirement benefit schemes (FURBS). Employers’ Class 1A NICs are payable on all taxable benefits-in-kind other than the provision of childcare.

Employee NICs are payable at 10% (8.4% for contracted-out employees) of income above £87 up to £575 per week. Earnings from £72 per week count towards contributory benefits. Employees over state pension age or under 16 do not pay NICs.

The employer NIC rate for 2001/02 is 11.9 % on all earnings above £87 a week (£4,535 a year). The rate will be 11.8% in 2002/03.

Self Employed

Class 2 NICs are flat-rate contributions of £2.00 a week (£104 a year) where a person’s self-employed earnings are over £3,955 a year.

Class 4 NICs are based on Sch D Case I or II profits for the year. For 2001/02 they are chargeable at a rate of 7% on profits between £4,535 and £29,900. The total payable for the year on income of £29,900 or more is £1,775.55. Class 4 NICs are not payable by self-employed people over state pension age or under 16 years.

Voluntary

Class 3 NICs are voluntary flat-rate NICs payable by individuals who would otherwise fail to qualify for retirement pension and certain other benefits because they have an insufficient Class 1 or Class 2 contribution record. The flat rate is £6.75 a week (£351.00 a year).

Contracting out of SERPS

If the employer has contracted the employee out of the State Earnings Related Pension Scheme (SERPS), the NIC rates are reduced.

• The reduction applies to the NICs on earnings up to £575 a week.
• The employee’s reduction is 1.6% and the employer’s reduction is 3% for salary-related schemes. For money-purchase schemes the employer’s reduction is 0.6%, but an additional age-related payment is made to the schemes by the National Insurance Contributions Office.
• A rebate equal to the NIC rate reduction is paid on earnings between £72 and £87.

If the employee contracts out using an appropriate personal pension scheme, the full NIC rates are payable and a rebate is paid by the National Insurance Contributions Office to the pension provider of the employee’s choice.

The value of the rebate is based on earnings between £72 and £575 a week and increases with age to an upper limit.